The emperor without clothes

By Achin Vanaik

FOLLOWING 1973-75, `80-82 and `89- 92, we are on the verge of a
fourth global recession. But overshadowing these conjunctures has
been the Long Downturn after the Golden Age (1948- 73). Whatever
the geographical variations such as the impressive performances
of the Chinese (from 1978) and the other East Asian countries
(till 1997), the basic facts concerning the global economy
(dominated by the triad of the U.S., Germany and Japan) are
undeniable. By all major indicators, there is a dramatic decline
in global performance between the Golden Age and the Long
Downturn. Average rates of growth, of productivity, wages,
investment and profit drop by roughly half. Economic orthodoxy
concedes the existence of (7-12 year) ``business cycle'' ups and
downs, claiming they are as natural as breathing. But far more
damaging would be any confession that there have not only been
longer (25-40 year) periods of serious downturn but that these
have been recurrent over the last two centuries - `long wave'
theories of capitalism's upswings and downswings which locate
this within capitalism's internal workings have always been
anathema to the neo-classical school.

Even to acknowledge the importance of the unflattering contrast
between the two eras immediately undermines the claims of neo-
liberalism (the most `purist', rightwing form of neo-classical
economics) to being the `emperor' of social engineering today,
the guide and key to economic prosperity for all. World
capitalism would then be seen to be failing its own highest past
standards. Which would raise questions about why this decline?
Why should we accept anti-Keynesian, neo-liberal justifications
of a clearly inferior present? Why cannot those virtues of full
employment-strong welfare be restored? What is it about
capitalism that made Keynesianism only a temporary palliative?

Rather than confronting such uncomfortable questions, acolytes of
orthodoxy, especially of neo-liberalism, prefer to divert
attention through non-sequiturs and unproven assertions. One
technique is to incessantly cite the failure of the
socialist/communist alternative, as if the former's inadequacies
somehow justify the inadequacies of contemporary capitalism!
Another is to repeatedly proclaim the current neo-liberal form of
economic globalisation as not just the only viable form of
capitalist development, but as the best. In short, orthodox
economics has no theory of capitalist crisis as its most honest
defenders admit. Insofar as crises periods are acknowledged as
they often have to be, they are explained away as the result of
factors essentially external to the `proper' functioning of a
capitalist economy, such as bad Government policies, trade
unions, leftist intellectual influence, oil shocks, cultural
variations, technical change, etc.

It is important to understand what this failure means and why it
takes place. An intellectual discipline (orthodox economics)
whose dominant theory is unable to explain important facts is
seriously flawed, especially when those facts are not
inconsequential but point to rather profound weaknesses in the
subject matter - the world economy - that is being investigated.
But when this discipline cannot carry out adequate self-
correction nor move towards better theoretical alternatives, then
whatever its limited value in explaining other facts, or as a
policy-guide of sorts, its preservation as the `hallowed'
dominant paradigm means the triumph not of social science but of
ideology. This is what neo-classical economics is.

This orthodoxy is governed by an assumption - equilibrium - that
makes it into a dogma whose god is market perfection. The
institutions that teach and promote it are a church. Its
practitioners and propagators are effectively a priesthood. Like
all true believers, it is not the sincerity of its acolytes that
is in dispute or doubt. The absence of an adequate theory of
crisis is a dagger at the very heart of this belief system but it
is not the `bad faith' of orthodox economists that is to blame
for failing to recognise this. Neo-classical economics by
definition makes it impossible to understand or accept that
severe crises are intrinsic to capitalism. It is the strangest of
social science disciplines. Elsewhere, conceptual abstractions or
`ideal types' (Weberian, Marxian, or whatever) are meant to serve
as first approximations. This is an entirely legitimate and
indeed, necessary, approach to understanding reality. This model
is then used to interrogate reality and understanding deepens
through a process of systematic modification and transformation
of the original model so that it becomes, like reality, more
complex. The end point of theoretical construction is necessarily
very different from its start.

But the starting and end point of neo-classical economics is
essentially the same! It is not the model that has to be changed
in order to grasp an ever-more complex reality but the other way
around. The problem with equilibrium analysis is not that it
refuses to discuss change but the very manner in which it
conceives of change. The `normal' model is of stasis and crisis
is a `disturbance' from the equilibriating market and must
therefore be seen as exceptional and external. In truth, it is
the other way around and stasis is the deviation from the
normality of an economy in motion.

Crises are rooted in the very nature of capitalism's fundamental
dynamic principle - accumulation through competition. Competition
is not simply the great virtue of capitalism (lauded by orthodox
economics) but also its biggest vice. Today, the most serious
effort to understand global capitalism comes from within the
tradition of marxist economics and economic history. However
discredited marxism may be as a political force and ideology, its
capacity to analyse and explain the workings of world capitalism
remain unsurpassed. The evidence supporting this claim is now
available.

It has been centred on the work of Robert Brenner and his path-
breaking ``The Economics of Global Turbulence: 1950-98'' (New
Left Review, May/June 1998) updated by his ``The Boom and the
Bubble'' (NLR, November/December 2000). This has been both
defended and critiqued by marxists of different hues who
nonetheless all share the fundamental assumption that capitalism
cannot escape the periodic dilemma of over-accumulation and over-
capacity and (despite sectoral variations) a declining average
rate of profit across the world economy as a whole, caused by the
actual unplanned nature of private competition. This contrasts
with the idealised version of what competition, according to the
scriptures, is supposed to do, namely equalise profit rates in
different sectors through exit and entry of capital. It is the
great merit of Brenner's analysis (backed by a wealth of
statistics) that he shows how in the competition between the
manufacturing sectors of Japan, Germany and the U.S. in the world
market, the entry of higher productivity, lower cost innovators
did not result in rapid exit of `older' capital rendered less
profitable, because already sunk fixed capital would have to be
paid for anyway. Therefore, as long as an adequate rate of return
could be earned on circulating capital, and given the importance
of the `intangible assets' built up by already existing producers
in a product line, the overall result predicted by his theory
(and confirmed empirically) was too little exit and too much
entry by the competing capitals of Germany, Japan and the U.S.
This resulted in an overall decline in the manufacturing rate of
profit which could not be compensated for by developments
(themselves uneven) in the services sector. Currency changes
between the yen, the mark and the dollar distributed these losses
and gains unevenly among these three locomotives of the world
economy but could not alter the overall situation.

Despite what `cleansing out' of older capital that has taken
place through recessions, lower wages, higher unemployment,
bankruptcies, etc., there is still no convincing evidence that
any of these economies (not even the U.S. which enjoyed something
of a bubble during 1995-99) has been able to restore the
profitability conditions of old that could promote a massive wave
of new high productivity investment that in turn can pull the
world economy on a new long-term upswing.